Hershey Prepares Solo Bid for Cadbury?

By now most investors are aware of Kraft Foods (KFT) offer to acquire England confectioner Cadbury PLC (CBY) for GBP10.4 billion pound ($16.9 billion). The negotiations have taken many twists and turns since the initial announcement in early September, and it appeared a deal looked closer than ever this morning as Italy’s Ferrero International SA dropped out of talks over a joint counteroffer with Hershey Co. (HSY). The counteroffer had been in the works since November but there was some question as to the level of interest from HSY. When Ferrero dropped out, it was suspected that Kraft was one step closer to a successful takeover. Now, there are reports from the Associated Press that Hershey’s is mulling over a solo offer to compete with Kraft.

The Associated Press cites someone familiar with Hershey’s plans; Hershey had already been working on this bid in parallel with the joint bid with Ferrero, just in case. Questions linger as to whether this bid will materialize or if this is just an effort to make their competitor further sweeten their offer for CBY. Kraft still has six days before it must make a final offer, and this could all be a ploy to coax more money Kraft who will of course become a direct competitor.

It was suspected that Hershey, a far smaller corporation than Dow-component Kraft, would be unlikely to go alone in such a massive deal. Reportedly it was the size of the potential bid that made the conservative, privately-held and family-operated Ferrero uneasy about the deal. HSY would have to top the $16.9 billion from KFT, which is more than double their current market cap. With only $120 million in cash on the balance sheet and a fair amount of debt, the deal would have to be largely financed by new capital. Would Hershey even be able to raise that kind of money through assets sales, private equity, secondary offerings, and debt instruments?

This corporate chess match has been underway for more than three months now, and we will be very interested to see what Kraft does next Tuesday. Cadbury management has been vocal in their displeasure with the current bid and obviously would like to get more cash for their company. At Ockham, we are skeptical that anything will come of the news out of Hershey, but it would be a great move if Kraft tries to remove any doubt and bid the price out of Hershey’s reach. Although the price may already be out of reach, and Kraft probably realizes this better than anyone.

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